President-elect Obama, a centerpiece of your campaign was your
pledge to cut taxes for 95 percent of American workers.
Middle-class voters, especially, connected strongly with this
pledge and expect their taxes to decline. Tax cuts are one key way
to strengthen the economy for both the short term and long term,
creating jobs and increasing wages. Targeting families, workers,
and small businesses is a good starting point, but your promised
tax cuts will deliver only minimal benefit to the groups you
target. You must go farther if your tax plan is to promote a
growing economy--something that is essential in our current
situation.

Reduce marginal tax rates and the total tax burden on
taxpaying families. You promised Americans that you will
cut taxes for 95 percent of workers[3] and restore fairness to the
tax code. To the average American, these words mean reducing
federal tax rates and the total tax burden so that all
taxpayers--retired or working, student or family--would get to keep
more of their own income to spend on their needs or to save and
invest as they see fit.

For middle-class families and other Americans, a pledge of
"broad-based tax relief" or to "cut taxes" does not mean narrow tax
breaks restricted to families who engage in activities that
Washington decides are worthy. And it certainly does not mean a
check from Washington for the millions of Americans who are not
even paying income tax today. Your tax plan features several of
these targeted tax breaks such as creating a new exemption for
low-income seniors so that they would pay no income taxes at all,
or expanding tax credits like the Child and Dependent Care credit
and the Hope Scholarship credit for higher education and then
making them refundable so that taxpayers could get money back even
if they paid no taxes.[4]

Instead of targeted tax relief for groups preferred by Washington,
reducing marginal tax rates would provide larger incentives for
work, innovation, and entrepreneurship--all things you have
emphasized that you intend to encourage.

Cut taxes for everyone, and do not increase taxes on
those who are most likely to save and invest. Your plan is
to pay for the income tax cuts provided to 95 percent of workers
with (1) a tax increase on those who make more than $250,000 and
(2) another set of unspecified tax increases. This short-sighted
class-warfare argument unfortunately appealed to many Americans,
but it would mean raising taxes on key investors and business
owners. Higher taxes on these Americans would make it more costly
to expand, innovate, and invest, so there would be fewer new
factories, fewer new products, and fewer jobs for American
families.

The income tax, moreover, is already highly progressive. Those who
earn over $250,000 already pay about 48 percent of all income
taxes,[5] yet you would raise their taxes to have
them pay an even greater share. On the other hand, 43 million tax
filers--nearly one-third of the 135.7 million who filed in
2006--paid no federal income taxes at all after credits,
deductions, and exemptions.[6]

Though it was very popular in the heat of the election to call for
tax hikes on the rich in order to "spread the wealth around," the
fact is that increasing taxes on the most successful only serves to
lower economic growth, discourage entrepreneurial risk taking, and
harm opportunities for the poor and middle class. Tax increases are
economically harmful at all times, but they are especially harmful
during a recession. President Herbert Hoover's decision in 1930 to
increase the top tax rate from 25 percent to 63 percent contributed
to the Great Depression.[7] As you have appeared to concede since the
election, today's economic problems underscore the need to expand
your tax cuts to include all taxpayers.

Lower capital gains taxes generally, not just on small
firms. You have pledged to help small businesses and
start-up companies by lowering the capital gains taxes investors
pay on the returns they earn from investing in these companies.[8] Small
businesses and start-ups are important engines of job growth in our
economy, and cutting capital gains taxes for them is an effective
way to stimulate this sector because small and start-up firms
depend on venture capital and invested savings. However, lowering
taxes on only some capital investments is very difficult to apply
in practice and likely to be counterproductive. Your limited
capital gains tax proposal would be difficult to implement, would
make the tax code even more complex, and would be less effective in
stimulating economic activity than you desire.

You will help small businesses and start-ups more if you lower the
tax rate on all capital gains. All businesses, large and
small, would benefit from the lower cost of capital and would have
a stronger incentive to begin or expand operations and make new
investments in equipment or other purchases. Cutting the tax on all
capital gains will also free capital that is currently "locked-in"
by the tax and allow it to move penalty-free to investments that
are more likely to spur growth.

Kill the death tax once and for all. The
estate tax is called the death tax for a good reason: It strikes
when families are dealing with the loss of a loved one. Though you
have called this a "Paris Hilton" tax, in reality the death tax
harms owners of small and medium-size businesses, often women and
minorities; farmers who poured their savings into their farms; and
workers who lose jobs as businesses are liquidated to pay the tax.
This harmful economic policy, another class-warfare relic, is
estimated to cost between 170,000 and 250,000 new jobs each year.[9]

Congress began to phase out the death tax in 2001, with a full
phase-out scheduled for 2010. But this tax cut will expire in 2011,
and the death tax will return with a vengeance with its high rate
and low exemption revived. Your proposal to allow it to rise like a
phoenix, albeit at a lower rate and higher exemption, will not
mitigate its many economic and moral flaws. Dying should not be a
taxable event, but under your plan, the federal government will
still capture nearly half of a grieving family's assets.

Instead, you should kill the death tax permanently so that
taxpayers do not have to waste valuable time or capital in estate
planning, families will not have to sell their businesses or
property just to pay this immoral tax, and no workers will suffer
when business are liquidated to pay the tax. It will also encourage
more saving and investment and higher jobs and wages.

Do not allow PAYGO and the Congressional Budget Office
(CBO) to back you into a corner on tax cuts or the AMT.
You have promised a return to fiscal responsibility and that you
plan to stick with "Pay As You Go Budgeting," or PAYGO,[10]
and you rightly proposed to adjust the way these PAYGO rules are
applied. The measure to which PAYGO is applied is determined by two
contradictory policies. The CBO projects its spending baseline by
assuming that all the laws authorizing spending, such as the
highway or farm programs, will be extended year after year and that
their spending levels will continue even though they expire
regularly under existing law. However, when it comes to taxes, the
CBO bases its baseline on current statute, and any rates,
deductions, credits, etc. that are scheduled to expire will do so
as scheduled.

You were right to dismiss this lopsided practice, which creates a
bias in favor of higher taxes and higher spending. If you adhere to
your PAYGO pledge, you must fix the CBO's unfair baseline
disparity; otherwise, your promised tax cuts for the middle class
will require hefty tax increases or spending cuts. Preserving
current law is not a tax cut, and allowing the tax cuts to expire
is a massive tax hike that neither the taxpayers nor the economy
can afford.[11]

Next year, over 20 million taxpayers, many of them middle-class,
will be snared into the pernicious trap of the alternative minimum
tax (AMT), which needlessly adds uncertainty and complexity to the
tax code. The AMT income exemption is not indexed for inflation, so
the AMT will continue to raise taxes on an ever-increasing number
of Americans. In response, Congress regularly passes a band-aid
"patch" so that middle-class taxpayers do not have to pay the
AMT.

You should make the patch permanent--or, better yet, repeal the
AMT completely--instead of settling for temporary patches. Then you
won't be raising taxes through the AMT on a growing number of
Americans at the same time you are cutting their taxes. Here again,
preventing a tax hike is not a tax cut, so there is no valid
argument that this fix should be paid for by imposing higher rates
on other taxpayers.

Conclusion

Your promise to cut taxes on 95 percent of Americans struck a
strong chord with voters, and your pledge to lower the capital
gains tax makes strong economic sense. If you follow the right
steps to cut taxes--cut marginal income tax rates for all
taxpayers, lower or eliminate capital gains taxes, and kill the
death tax--you will allow all taxpayers to keep more of their
money, improve fairness, and also take strong steps to encourage
economic growth. This is important at any time but essential in
this troubled economy.

Cutting taxes only for the selected groups you targeted in the
campaign and then raising them for high-earners will not generate
the growth America needs. Your first priority when taking office
must be to help stabilize a flagging economy, and that means
lowering taxes for all Americans.